Investor appetite for financial technology firms waned in 2023, ending a venture capital binge that saw valuations and deal-flow surge over the previous couple of years.
Specialist researcher, Pitchbook, notes in a just-published annual review of the sector that after “growing at a feverish pace for the past two years, fintech appears to be returning to a sense of normalcy”.
“Fintech investors generated $34.6 billion across 2,055 deals in 2023, a -43.8% and -32.4% YoY decline, respectively,” the Pitchbook report says. “Valuations also mostly declined, with the median of, $19.4 million, down -13% from 2022’s median.”
Pitchbook says the fintech fizzle last year came amid the general backdrop of rising interest rates, more expensive capital, higher inflation, consumer wealth concerns and global political unrest.
In the wash-up, venture capital money flowed away from direct-to-consumer offerings in favour of an investment strategy “significantly biased toward B2B companies, which often deliver more predictable revenue streams and capture higher margins”.
“However, the fintech industry is now at an inflection point,” the report says. “Greater diligence from investors has encouraged business models to prioritize growth as well as profitability, helping to separate practicality from hype. As such, we expect many of the startups leveraging emerging technologies such as generative artificial intelligence (GenAI), instant payment rails, and open banking infrastructure to rise out of the challenging operating environment and become high-quality companies.”
While the fintech investment money is betting mainly on payments, regulation-focused solutions and banking system componentry, Pitchbook notes some emerging artificial intelligence (AI) opportunities in trading platforms, wealth management and financial planning.
“Public rolled out its AI investment assistant Alpha, eToro partnered with GenAI company Bridgewise to offer an AI-powered portfolio, and Streetbeat introduced an investor copilot,” the report says. “Financial planning platforms are also being enhanced with AI. For example, startups Range, Parthean, and Monarch are improving financial planning functions with LLMs [large language models].”
Overall, the US-centric Pitchbook fintech report – authored by senior analyst, Rudy Yang – says the sector is maturing with a focus on profitable enterprise-focused solutions rather the “crowded” business-to-consumer market.
The venture capital researcher is a Morningstar subsidiary.